Can LNG prevail against the dark side of energy

When I talked to a friend the other morning, he told me that gas was the most important fuel for power generation in Japan. I brought him up to speed on the fact that not LNG but rather coal is the top dog when it comes to producing electricity in those islands and that coal consumption is rapidly growing.

While coal imports are 3 digits (almost 115 million short tons in 2015) and growing, LNG imports are two digits (79,6 million tons in 2015 to be precise) and falling. In 2000, coal and LNG were almost equal in terms of volume. See where the journey goes?

That came as a shock to him who is – like me – an LNG aficionado. Both of us (and some others who have fallen for LNG) like to believe that the planet has at least conceptually gotten pulled over to the idea of clean and cold energy as a fuel but reality is – as so very often – different.

We like to think – and that seems conventional wisdom – that black pieces of hard matter must surely be on their way out. At least in the developed world, as after COP21, everyone must have firmly embarked on the path to phase out this dirty stuff to reduce airborne carbon. What’s true is that among the G7 nations, Japan is the only one with a growing coal portfolio in absolute as well as in relative terms. Coal is very much on its way into oblivion in the US and many parts of Europe – but then again, with rising prices for the dark commodity, coal producers in North America also start to feel the winds of hope again.

Coal showed the steepest price rally of any energy commodity for the last months and still – LNG still struggles against coal in Japan and some other Asian destinations. The price for cooking coal in Asia has almost reached USD 100.- per short ton which means almost doubling as compared to last year. That’s whopping.

Analysts say that this rally is not sustainable so if LNG cannot compete with coal at those relatively high price levels and coal is on the way down again, it becomes ever more grueling for LNG to compete with it. With Japan being the biggest LNG buyer worldwide, this is bound to cause some ripples outside the megalomaniac Asian marketplace.

However, is it price alone? Well no.

Before Fukushima, Japan had a simple plan when it came to power generation. They used coal and nuclear for base load electricity needs plus oil products and LNG for peak power generation. Fukushima broke that equilibrium as desperate Japanese had to throw everything they could get into the cauldron to keep lights on. Now, some years down the timeline and with hindsight, they want to get back to where they were and as nuclear is still much smaller than before Fukushima they must go for more coal to get back.

However, the world has already gotten used to a Japan that uses much, much more LNG than before the disaster. So what they see as a corrective measure to an unnatural state in their energy balance many of us tend to see as a mortal threat to our livelihoods. How many LNG projects have been built on the assumption that Japan is always going to buy at virtually any price?

Part of the LNG portfolio in Japan was a bridge toward better planning, but we hoped that this rather unwanted and accidental portfolio shift might be more permanent. However, coal is so much cheaper and economically strained Japan must also try to lower its expenses across the board. COP21 is a fine marketing stunt for some world leaders who think that they can afford it but Japan is already deep in its economic quagmire for many, many years now and money matters loom large as a result.

With the Japanese economy slowing even more plus more coal in the basket, there will be ever more unnecessary LNG spilling onto the market. This not only comes from the shiny new projects in Australia and the US but also from legacy producers as remarketing volumes from Japanese utilities that don’t need it anymore.

If you are a large Japanese utility and you have over-purchased on LNG – what is your biggest concern? Maxing out all trading gimmicks to make the biggest possible cut or just getting rid of your overhang? Right – the overhang is going to be the thing that gives you sleepless nights. This means that they will send those cargoes wherever they can dump them and there is just one dumping ground for LNG worldwide – that’s North Western Europe. If this is not the first post you ever read you will hardly be surprised by this affirmation.

Let’s push it a little further. Ever since I learned what LNG is a little while back, I have been wondering why gas companies go all those lengths through liquefying gas, transporting it with huge thermos cans over the ocean, and storing it at receiving terminals to do nothing more than warming it up again to press it into a pipe to mingle with all the other ordinary pipeline gas.

LNG could be so much more for us and slowly those new avenues (I really mean LNG as a fuel for mobility) are mushrooming.

Try to fill coal into a truck tank!

When it comes to electricity generation (especially the kind of large utility-type plants that produce the ground current) LNG (and its more ephemeral brother Natural Gas) is squeezed by coal, nukes, and renewables. Not that LNG & NG could and should not compete in this space. It’s an outstanding primary energy form but there are others and filtering coal emissions becomes so much easier if you have a huge plant that is never going to move one meter as opposed to whizzing vehicles.

However, LNG should be out and not worry so much about the power world while it should make a bigger, much bigger effort in debunking some mobility hypes such as trucks on batteries or hydrogen as a fuel or …

Mobility is the biggest oil gobbler (ask OPEC) and LNG can cut into that market with relative ease just as coal cuts into LNG’s market in Japan today.

If LNG does not work seriously on LNG as a fuel for everything, it’s going to hang in the doldrums for much, much longer than just a few years. That’s not a new message. Let’s wake policy-makers up and get them working because all this is not going to happen without outside intervention and in the meantime, LNG is having a dirty fight on its hands against coal in Asia.